Climate Change Agreements

Introduction to Climate Change Agreements

The UK Government set itself a domestic objective to reduce emissions of carbon dioxide (CO2) by 20% on 1990 levels by 2010. As a result, a range of policies for reducing greenhouse gas emissions were introduced. Major components of this programme are the Climate Change Levy (CCL) and Climate Change Agreements (CCAs) announced in the 1999 Budget and introduced on 1 April 2001.

The CCL is chargeable on the industrial and commercial energy supply of consumers in the following sectors: Industry, Commerce, Agriculture, Public and service sectors.

The CCL does not apply to supplies used by domestic consumers, by charities for non-business use or by very small firms using domestic levels of energy (roughly equivalent to the energy used by a six-bedroom house).

CCL is charged on taxable energy supplies and includes: Electricity, Natural gas, Petroleum and hydrocarbon gas in liquid form, Coal and lignite and coke.

The CCL is added to bills before VAT and, although there is no legal requirement for it to be shown, it will usually appear as a separate item on energy bills. For more information on administration of the CCL, please contact HM Revenue and Customs' Helpdesk on 0845 010 9000.

The Government recognised that energy intensive industries that are exposed to overseas competition should be given special consideration. Therefore, it agreed that such industries could qualify for a discount of up to 80% of the CCL. This would be done through a CCA.

CCAs have a two-tier structure. There is a sector-level agreement between DECC and the sector or trade association (known as an umbrella agreement), and individual agreements between DECC and the operator of the facility (known as underlying agreements). DECC currently contracts AEA Energy & Environment (AEA) to provide technical support in the operation of the CCAs.

In return for the CCL discount, the sector association must agree challenging targets to improve energy efficiency or reduce carbon emissions across the sector. Companies within the sector will be expected to meet equivalently demanding targets to contribute to the sector total.

Energy intensive industries were initially defined as industries that are covered by Part A1 or A2 headings in Part 1 of Schedule 1 to the Pollution Prevention and Control (England and Wales) Regulations 2000. This definition applies across the UK. The regulations cover a wide range of industrial sectors, from major energy intensive processes such as steel, chemicals and cement, to agricultural sectors, such as intensive pig and poultry rearing. Smaller sites that do not meet the size thresholds of the Pollution Prevention and Control (PPC) Regulations, but which otherwise would qualify, are also eligible for an agreement. The exception to this is combustion plants of greater than 50 MW capacity and the 3 MW limit for burning of waste oil, recovered oil or fuel manufactured from or comprising waste.

In 2006, a second wave of CCAs was rolled out covering energy intensive industrial and manufacturing sectors that were not PPC regulated and, therefore, had been excluded from the scheme. These sectors must meet strict criteria related to relative energy intensity (EI) and international competitiveness. The value of energy used must be 3% or more of production value for the sector. In addition, they must meet, or exceed, an import penetration test of 50% or more1. This is a test that is applied to the value of the sector as a whole to determine its exposure to international competition. Sectors that do not meet the international competitiveness requirement must have an EI of 10% or more. The sector qualification is based on the average energy cost and production values for three consecutive years. The eligibility test is applied at sector level, not at individual company or site level. The test is applied only at the beginning of the agreement so as not to disincentivise energy efficiency. Sectors that have negotiated EI agreements include industrial gases, cold storage and glass manipulators.